We had another question this past week from a reader (by the way keep the questions coming in as we’re always looking for something to write about. If you’ve got one just go here and ask us).
The question was:
“Hi David, my fellow gold bug at work here just asked me the following question but I don’t know the answer, perhaps you do??
If/when the US dollar collapses, will gold still be priced in US dollars and if not, then what?”
This is a tough one alright and the answer is unknowable. But we’ll pull out our lucky crystal ball and have a crack at it anyway for better or for worse, so here goes….
We’ll take this to refer to the collapse in value of the global reserve currency, the US dollar.
Of course, this could play out in a number of ways.
Perhaps the US Federal Reserve simply prints so much money that buyers of US government bonds lose all faith in the value of the dollar and refuse to buy anymore bonds and/or even start to dump those they hold already. With the US government unable to borrow, this would require the Fed to then simply print money to cover the entire US budget deficit. This is what has happened in the recent past to the likes of Zimbabwe, or famously in Weimar Germany in the 1920’s.
In this case the currency may still be accepted for a while but it takes more and more to pay for goods and services.
As coined by Professor Antal Fekete in this interview: Prof. Fekete on Hyper Deflation.
Where capital is destroyed and prices continue to drop further and further.
Take the situation in Ukraine with the US threatening sanctions cutting Russia off from the international financial system. This could backfire on the US. If Russia managed to continue to trade perhaps using gold like Iran did recently, this could prompt other nations to confront the US and see less and less use of the dollar.
Of course, all currencies today are priced with the USD as the reference point. And anyone with a cursory understanding of monetary history will know that this is a floating or elastic reference point.
But the US dollar needs to function in order for all currencies to continue to function.
Many talk about the US dollar being the first to collapse. However as it is at the centre it could likely be the last. We first heard Sandeep Jaitly say this many years ago and it took a bit to get our head around. More recently Ronald Stoeferle also was of this theory when in NZ last year.
We are seeing this currently, with many emerging market currencies falling massively against the dollar in the past year. A collapse is more likely to begin in the periphery and move towards the centre. So somewhat paradoxically, in a “dollar collapse”, it may well be that the US dollar is the last domino to fall.
There has always been some well respected and well used alternative currency to “swap” into. Take Zimbabwe recently for example. They used the USD as their local currency to dig themselves out of the very large hyper inflationary hole the Mugabe government and Gideon Gono central bank had dug for the country.
So the point is a US dollar “collapse”, regardless of the form it took would be a very big deal.
Now then back to the question…
If the US dollar collapsed, would gold still be priced in US dollars and if not, then what?
The short answer is – it depends.
We can think of a number of scenarios that could play out.
If the US dollar was somehow completely wiped out, we could see a return to goods and services being priced in ounces of gold and silver rather than in dollars. This may seem antiquated at first blush, however monetary systems operated for centuries in the past like this. Up until 1971 the dollar was defined as 1/35th of an ounce of gold, although only between governments not for the man in the street.
The Chinese are certainly taking steps to promote the use of the renminbi. Setting up agreements with many nations bypassing the use of the dollar in international trade. In fact just this week they announced they would allow currency movements to double to 2%, from the 1% which had been the case since April 2012. So their peg to the US dollar has been watered down further. They are also further promoting the trading of gold. The Shanghai Gold Exchange delivers a vast amount of physical gold every month.
However we also recall reading a quote from a senior party member that they weren’t keen to have the global reserve currency as that would require them to run a trade deficit as the US does.
This would appear to be the preferred outcome for the globalists and central planners as it would give them even more control and power than they have currently. One angle could be that the masses would be crying out for help and this new currency would be put forward as a way to transition to a better future. This could be “gold backed”, but would be tightly controlled by the few that manage the debt and credit of the world today.
This is Currency Wars author Jim Rickards’ most likely outcome. It would see multiple currencies involved in a new basket of currencies. However the USD would still exist in this example as part of the basket. Gold would also be involved. So we could still see regional or national currencies still. Gold may still be “priced” in dollars.
People trading goods and services directly is not the most likely outcome we’d say. This is the angle of those that say I’d rather have food, fuel and cigarettes and liquor to trade with other than gold or silver. However odds are gold and silver would emerge if not instantly at least after a short amount of time as a preferred means of exchange, and unit of account in this situation. Plus there’s a limit to how much food fuel and liquor you can store and how long they’ll last for. So in this case a similarity to the first option, goods and services would be priced in ounces of gold and silver.
(Here’s a related article we wrote last year. What Good is a Bar of Gold When the Shelves are Empty?)
Here’s our ideal. A free market for money as we discuss in more depth here. The Gold Standard: What Do We Think About it?
In this case virtual currencies may also rise up – ala Bitcoin and others. However we think in a true free market for money it’s likely they would need some tangible backing. So perhaps gold and silver as store of value, unit of account (again goods priced in ounces not dollars), but some technological addition to aid in the means of exchange?
Just like any free market, odds are the best currency would become the most popular and rise to the top. Throughout history the best money has been gold and silver. We’re not sure that technology will necessarily change that.
A complete dollar collapse would be chaotic and would wipe out much of the paper wealth that exists today. So it’s perhaps unlikely “The Powers That Be” would allow this to occur.
But if things got bad enough how could they stop it?
With a “simple” overnight revaluation. We could wake up one Monday morning and the dollar might have been revalued so an ounce of gold now gives you say $10,000. All other currencies would be affected by this move also – in relation to their value against the dollar. Holders of gold would be advantaged and all others would see a loss of purchasing power.
The purchasing power of gold and silver will have increased significantly from what they are today. Why? Well, there would be no reason for the monetary system to change if they didn’t. We could just carry on as we are today with the US dollar at the centre.
What do you think? What would a new monetary system look like? Would things be priced in gold or gold still priced in another or other currencies? Let us know you’re alive and leave a comment below…
If you’ve enjoyed this here’s a related article you might also like. Reader Question | Why is Gold More Valuable Than Worthless Paper